The cannabis industry made $5.4 billion in 2015. Legally. That's $5.4 billion worth of businesses growing and cultivating plants, processing and shipping products, and selling marijuana, cannabis oil, and all manner of edibles at dispensaries. That figure is forecast to hit $22.8 billion by 2020 according to the latest State of Legal Marijuana Markets Report from ArcView Market Research and cannabis-focused data analysis firm, New Frontier. The cannabis industry's booming economy needs technology to function, and Flowhub is one of the companies creating hardware and software for businesses at every step of that process pipeline.

Headquartered in Denver, CO, Flowhub is a seed-to-sale management and compliance platform for the legal cannabis industry. Founded in January 2015 by CEO Kyle Sherman and CFO Chase Wiseman, the startup offers a mobile scanning and asset management device called the NUG for growers and retailers, a newly released point-of-sale (POS) system for dispensaries, and a Software-as-a-Service (SaaS) platform accessed via web or iOS application from which to run operations.

Why It Works For BusinessesFlowhub's other role in the legal cannabis equation is a more crucial one for businesses. Flowhub manages business compliance with state-by-state regulations for the legal growth and sale of marijuana. In Colorado, that means working with the state's metrc (Marijuana Enforcement Tracking Reporting Compliance) system of Radio Frequency Identification (RFID) tags and tracking IDs for every plant grown, every product sold, and every professional involved in the process. As Sherman put it, "this is not the cannabis industry, it's the compliance industry. If you're not compliant, you're not selling cannabis."

Flowhub works with the state of Colorado's application programming interface (API) to track the IDs of every person, plant, and product associated with cannabis production and sale, and to automate the compliance process for businesses and customers. They're beginning to do the same in Oregon and Alaska where the state governments also chose metrc as the compliance system.

It's not just about Alaska, Colorado, and Oregon though; it's about working with regulators state by state as legalization progresses, to integrate with different mandated systems and requirements. Washington is already presenting a problem for Flowhub, spurning metrc in favor its own traceability system contracted to BioTrackTHC, another seed-to-sale solution company. Systems such as metrc tag and track inventory, but compliance is still painstakingly manual without technology to interface with the state system. It's about making compliance dead simple, Sherman said, while at the same time, helping entrepreneurs (who have never run a legal business before) with data-driven operations.

"You have a lot of people coming into this business from the black market, some who were growing for maybe 20 years illegally," said Sherman. "They're not used to best practices and standard operating procedures. A lot aren't technically inclined, either. Our goal as a company is to make compliance easy for the end-user so that, no matter what, people are staying compliant. The metrc system is the way we're going to legitimize cannabis in the United States."

Inside the PlatformSherman moved from Los Angeles to Denver after Colorado's legalization in early 2014, handling marketing for companies such as Dixie Elixirs and Weedmaps, and managing state compliance for a marijuana-infused products company run by Matt Berger, creator of the Bubba Kush strain of marijuana.

"When I was a supply chain manager out here, I personally used BioTrack for almost six months, and it was not a usable piece of software. It's why we started the company," said Sherman. "On each plant's metrc tag is a 24-character identification code, and people were writing these tag numbers down by hand. Can you imagine that? [That's] 24 characters for each plant in a grow of 10,000, reported back to the state one at a time."

There are two sides to Flowhub's platform: the grow side and the retail side. Using the NUG mobile scanning device, growers scan plant tags directly into Flowhub and the state system, and can use a few simple actions—Move, Destroy, Lookup, and Harvest—to track grows and log inventory (as batches are packaged and shipped to facilities for processing into edibles and infused products, and to dispensaries for sale). The same NUG device is then used on the retail side to scan customer IDs and employee badge numbers (everyone who works in Colorado's cannabis industry is given a background check and issued a badge by the state) to check in dispensary customers and load their profile directly into Flowhub's POS system. It's one software platform, too. Growers and dispensaries both log into the same cloud-based interface and deal with the same inventory data, and every action they perform is logged for compliance.

"Our system's all baked together into one platform," said Sherman. "When you scan an ID, you'll see it pulls up the information with some green check marks to let me know if this customer is legitimate—making sure they're not underage, that their ID isn't expired, and showing me as the budtender what the legal limit they can buy is. The system also runs a second identity check as mandated by state law. Then I can check him in as 'rec' [recreational] or med patient and the system puts him right into the queue."

Dispensaries have always been required to scan IDs and log transactions for medical patients. But, before this kind of system, it was all manual photocopying and scanning. Flowhub includes business document management capabilities similar to how banking apps now enable mobile check deposits. For any signed documents to add to a customer's file, budtenders simply center the document and snap a photo to scan it into their file in the Flowhub system.

Flowhub integrates with all major barcode scanners via USB so, once the customer is checked in, the budtender can scan and add items to the their cart through the cashier side of the POS interface. Sherman and Wiseman explained that, if your business has already bought POS systems with hardware such as scanners, receipt and label printers, and smart cash drawers, Flowhub doesn't want you to throw that out. The POS system officially rolled out this month and is currently being onboarded with 77 different retailers in dispensaries.

In the POS interface itself, Flowhub isn't managing just the inventory, sales, and compliance; the platform is actually helping run the business. Retailers can configure features such as a discount engine to add product promotions using manager-level permissions (to stop budtenders from giving out "friend discounts"), a loyalty program with a points system for rewards, and a surprising amount of business intelligence (BI) reporting to help businesses improve sales. The startup is currently rebuilding its grow app for release in Q3, and plans to launch a Marijuana Infused Products (MIPS) app in late 2016.

"We're not just point-of-sale software. This is about improving your business and your supply chain, and saving you money," said Sherman. "Our sales report PDFs give people insight into their top-selling products, sales breakdowns, top-performing specials, how many transactions you've had versus total cost per ticket, stuff like that. Every screen in the app also has its own activity feed tracking every transaction, every click in our app, and the most granular customer detail for compliance and for your bottom line."

Business Plan BreakdownFlowhub raised $500,000 in seed funding in April 2015, and recently filed a closing of $1.7 million of a $3 Million Series A funding round with the SEC. The startup operates under a subscription-based SaaS model in which businesses pay a low monthly fee for access to the grow/retail management and compliance platform, and put down a deposit on the NUG device. Flowhub supplies the all-in-one NUG unit, including the iPhone housed within the device, and pays for the data plan. The subscription plans are all month-to-month, with no long-term contracts.

The startup's main competitors are BioTrackTHC, a Florida-based company that pivoted from pharmaceutical tracking software to cannabis, and MJ Freeway. Sherman explained that, while BioTrackTHC owns 35 to 40 percent of the market share right now and MJ Freeway has 50 percent, Flowhub's technology is the differentiator.

"It's about being a first-mover in the regulated industry," said Sherman. "Our competitors' software has been retrofit for the cannabis industry instead of made for it. BioTrack software is using very old technology from the 90s. MJ Freeway is a web-based app we've heard is built on blogging platform Drupal. Imagine using WordPress or Drupal to manage your enterprise cannabis facility."

The "enterprise cannabis" factor is an important one to the startup's growth. Flowhub's largest customer is Native Roots, the largest cultivation and dispensary company in the cannabis industry; Flowhub's seed-to-sale platform is running the company's entire supply chain. The startup's ancillary status (it facilitates the cannabis industry without actually touching any plants or products) also lowers the risk for investors. Big investors are beginning to put money into the industry, too. Peter Thiel's Founders Fund is invested in Privateer Holdings, the company that owns Bob Marley's brand of marijuana, and billionaire Sean Parker donated $500,000 earlier this year to back a marijuana legalization initiative in California.

"We've worked alongside a lot of these small, medium, and enterprise-size businesses in the space to build this software," said Sherman. "We've gotten to see first-hand what enterprise cannabislooks like. It's very different than having one store. When you have more than 10-15 stores, things really start to change."

As for Flowhub's long-term business potential (along with the entire industry's), it's tied to legalization and enforcement. The Supreme Court recently declined to hear challenges to Colorado's marijuana laws. But the national legalization fight has barely started, and Flowhub's business model relies on advocating for the metrc system on a state-by-state basis in order to work directly with governments on compliance. Our experts said Flowhub is well-positioned to succeed on a variety of levels, but only as far as legalization takes it.

Ask the Experts: Startup AdviceRoseanne Wincek, Vice President at Institutional Venture Partnerssaid Flowhub is smart to go after marijuana as many are expecting the market to light up as states legalize recreational use. Wincek is encouraged by the startup's role as a compliance system, but also said state-by-state legislation and reticent traditional investors could potentially slow the company's growth.

"I like that they are becoming a system of record, and creating compliance and regulatory features, which have a clear value proposition," said Wincek. "However, Flowhub may face a smaller-than-expected market opportunity if states beyond the current four are slow to, or fail to, pass legalization legislation. Also, some traditional investors may refrain from [investing in] or may not be able to invest in marijuana-associated businesses, possibly limiting the company's leverage in financing negotiations or increasing future follow-on financing risk."

Aaron Batalion, Partner, Lightspeed Venture Partners (co-founder and former CTO of LivingSocial) answered the question of legal momentum by pointing to a key upcoming California decision. He said Flowhub's approach to its POS system might be the key to capturing wider markets.

"Later this year, California will have a recreational use referendum which, if passed, may tip many more US states towards legalization," said Batalion. "Flowhub's focus on the agricultural process and regulatory framework is a good one. That said, as cannabis product innovation continues, a bigger opportunity may be in participating in the customer/dispensary/wholesale transaction flow which their POS offering may enable."

Professor Sam Kamin, Expert in marijuana legalization and regulations, and Director of the Constitutional Rights and Remedies Program at the University of Denver. He also served on Colorado Gov. John Hickenlooper's 2012 task force to implement the state's Amendment 64 legislation. He currently serves on the ACLU of California's Blue Ribbon Commission to study marijuana legalization. Keeping the regulatory hurdles in mind, Kamin believes Flowhub is positioned well in a lower-risk, higher-influence role to attract investors while helping to shape regulatory policy. He also warned that, in an industry still at the mercy of national politics, there will always be risk.

"For people looking to invest, these ancillary businesses are much more attractive and carry significantly lower legal risk than if you're in the business of growing and selling marijuana," said Kamin. "Those risks aren't zero, though, and in January we'll have a new president and a new attorney general, and they may have a different view on marijuana enforcement. Everyone putting money into this business is betting that not much will change."

Know a cool startup we should spotlight next? Are you a VC firm interested in weighing in on featured startups? Email your suggestions to robert_marvin@pcmag.com.

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